Kuwait Leading Islamic Bank, Kuwait Finance House (KFH)
Interview with Mohammed Sulaiman Al-Omar, CEO of Kuwait Finance House (KFH). Kuwait Finance House is in green numbers and working within the markets. If we as Kuwait Finance House look at Kuwait costs of funding, it came down from 6.5% to 3% which is almost 50% and if I was a bank and wanted to price my product I would need to look at the base rate, which has come down quite a huge percentage. Thus, Kuwait Finance House is still in the green and are optimistic for the market in the banking sector.
How do you envision the future of the GCC monetary union and in your opinion, is the GCC going to play a significant role on the global stage alongside giants like China and India?
According to the Central Bank, Kuwait’s economy may contract by 1.5-2% this year before starting to grow in 2010. What is the cause of the downturn and how well is the Kuwaiti economy insulated from the global economic downturn?
Kuwait Finance House (KFH), Mohammed Sulaiman Al-Omar: After the Central Bank became aware of the economic crisis they introduced a stimulative package that allowed any financing to the real economy would enjoy a 50% guaranty from the government of Kuwait. The mechanism is there but the people are not coming to borrow and they its very uncertain still within the country. I believe he took into consideration the significantly lower demand for financing in the real economy and the government spending is not there. There are, however, announcement from the government to increase government spending- allocating about 25 billion KD for oil infrastructure related projects and I think this is very important and may change the economic forecast of Kuwait in the future. Another issue to look at is the requirement to rebuild Iraq which will require a lot of resources. Since Kuwait is near by we can play a major role in the rebuilding and our economy can benefit from that due to our established infrastructure. I am not saying 2010 wont be difficult but if these two elements come into the playing field I feel there will be an adjustment to the outlook of our economy.
If we look at the banking sector in general, how do you assess the situation in Kuwait’s Islamic banking sector and its ability to overcome the financial crisis?
Kuwait Finance House (KFH), Mohammed Sulaiman Al-Omar: I think stimulus package and stability on deposit introduced by the government of Kuwait has given stability to the banking sector and this has added strength to the sector and kept it intact through the crisis. We don’t have pressure to pay off mature loans because we operated off of retail deposits that are more stable than institutional deposits in Kuwait. The Central Bank with the leadership of the government introduced guaranteed deposit schemes into the Kuwaiti Banks due to the other GCC countries doing similar deposits. This move was strategic by our government to remain competitive in the banking sector. On the other side, the stimulative package has added more comfort to the sector because it will cover the shortfall on provisions or other real estate and losses due to financial investment. However, no bank has used this yet because no one has had to cover these shortages in Kuwait as of yet.
Many argue that Islamic finance will provide very substantial and promising opportunities for specialization and diversification. Do you see Islamic finance as the providential response for the global financial system?
Kuwait Finance House (KFH), Mohammed Sulaiman Al-Omar: I think Islamic banking, trading assets rather than bank notes, is important because it affects the real economy. I think everyone has an interest in seeing Islamic banking activities increase. We do see that we can benefit the real economy by doing construction, trading on assets, buying assets and leasing or selling them to customers. We have never changed the way we do this type of business and I think it is the right time to be focused on these activities, as they affect the real economy and the interest of government is to see economic growth rather than downsizing the economy.
The recent news in Dubai has come as a shock to many. How challenging is it to raise capital and how well prepared is Kuwait Finance House to overcome the global economic downturn?
Kuwait Finance House (KFH), Mohammed Sulaiman Al-Omar: I think raising capital is different- even in the US and Europe it is difficult for most institutions to raise capital in this economic climate. In Kuwait we are not dependent on raising capital from foreign financial institutions because the banking sector does not benefit from this at the Central Bank. I think we are seeing a lot of activity and deposit increases because our customers are shying away from investment and are therefore putting it in the banking sector and the banking sectors are looking to do financing but there is a the real and mitigated risk for this. I think what happened in Dubai is a normal effect and outcome of the economic crisis. There are international banks that financed institutions within the GCC and now they want their money back. Dubai is still an attractive place and the infrastructure for investment is still there. I believe this is a matter of restructuring their debt and most creditors will understand even though this is unexpected but it has been done before in the past.
Can you describe the challenges and opportunities associated with investing during the global economic downturn?
Kuwait Finance House (KFH), Mohammed Sulaiman Al-Omar: One of the challenges is asset evaluation. For example, if you look at supply and demand for real estate where it is almost fixed there is no way you can take out a surplus of real estate space from the market. Having a real value placed on things like that to stimulate the demand for these types of projects will encourage people to do more business and increase job opportunities while allowing for economic growth. I am very optimistic that we will be able to tackle this crisis.
The crisis hit many countries- to what extent has Kuwait Finance House been hit by the downturn compared to other Islamic finance houses?
Kuwait Finance House (KFH), Mohammed Sulaiman Al-Omar: Kuwait Finance House is a player in the international market and whatever effects the international market will effect us and our clients. To a lesser extent, Kuwait Finance House can say that because we don’t have sub-prime lending and we don’t have de-leveraging of banking balance sheets. The effect that we saw is that most of the Kuwaiti investment companies went abroad and investment abroad, borrowing from international banks. Once the maturity came in they couldn’t refinance them and this affected the companies ability to pay back the money so they started to sell off their assets. If you have company A selling asset and another company comes in selling asset then you have deterioration of asset value and that will effect collateral across Kuwait. The stimulative packaged introduced by Central Bank and endorsed by the government of Kuwait eased this problem for us. I think we will be more active coming back into the market if we see the government spending increase.
Kuwait Finance House posted a 46% decline in the third quarter net profits and Kuwait’s biggest Islamic lender posted a 46% decline in the third quarter net profits. How would you characterize your investment strategy, the key fields you will invest in, and what plans and emergency plans do you have in store to bring the bank into green numbers?
Kuwait Finance House (KFH), Mohammed Sulaiman Al-Omar: We are in green numbers and working within the markets. If we look at Kuwaiti costs of funding it came down from 6.5% to 3% which is almost 50% and if I was a bank and wanted to price my product I would need to look at the base rate, which has come down quite a huge percentage. Thus, we are still in the green and we are optimistic for the market in the banking sector.
How would you define your major challenge at Kuwait Finance House?
Kuwait Finance House (KFH), Mohammed Sulaiman Al-Omar: The major challenges are enjoying the huge demand on Islamic banking. We saw the announcement that the Central Bank granted BKE to operate according to Shari’ah so there is a fifth bank entering the market which shows that the market is growing for Islamic banking. There is a lot of growth in Islamic banking and we have to mitigate our risk in the unstable economy and increase the awareness of the political and economic risks surrounding us. The opportunity lies ahead of us and we will try to reassess our position more frequently rather than waiting every year to review and change our strategic compliance. I am sure 2010 will create a lot of opportunities for Kuwait Finance House.
How does Kuwait Finance House assess sustainable development in terms of both internet procedures and investments you are making?
Kuwait Finance House (KFH), Mohammed Sulaiman Al-Omar: A major accomplishment during this crisis is being able to stand against the wind. We have to increase our risk analyses, evaluate our procedures and strengthen our policies as well as learn from the past. Reinforcing our decision making with a better understanding of the presented risks should mitigate the risks. We are learning and increasing our awareness by looking to other cases around us.
Kuwait Finance House was awarded an aware naming it the “Best Investment Bank” in Kuwait for its success in the investment field and businesses. What does this reward mean to you?
Kuwait Finance House (KFH), Mohammed Sulaiman Al-Omar: The award tells us that what our initiatives are correct and that we should continue along this path. I think that because the measure of success comes from someone outside who evaluates our activities is a very good sign that we are on the right track with our investment banking activities.
What are you expansion plans and strategic goals for 2010? How do you envision Kuwait Finance House for 2015?
Kuwait Finance House (KFH), Mohammed Sulaiman Al-Omar: We are concentrating our activities in two areas: the GCC and internationally. We are in Saudi Arabia, Bahrain, the UAE, and we look forward to moving into other countries. The opportunities ahead of us in the other countries are great because they have been less affected by the economic crisis and the GCC governments adopted the stimulative package to encourage investment and lending on the real economy for their countries. In Saudi Arabia, government spending is big and this creates a good opportunity for us as well. On the international market we have signed an agreement with UDR to create a residential apartment investment project for income production and we would like to replicate these with other operators in the US and Europe.